Economy in Brief

Game of Growth: Winter is not coming...it’s just still here German consumer climate edges higher in April. It is still the 15th weakest monthly reading in the last 24-plus years (292 months) of its survey existence. The reading ranks in the lower five-percentile (5.3 percentile) of all readings in the history of survey and is still exceptionally weak. If this is a climate reading, it is still winter in Germany.

Learning from Germany’s Climate History Readings on this measure were largely positive back to 2000 when the survey began. It logged a series of negative readings (15 months of negative readings) from March 2002 through May 2003; those readings never got weaker than a reading of -3.5.

Covid brought the next set of negative readings to GfK from May 2020 to September 2021. There were 17 negative months in a row that began with the deep negative reading at -23.1 in May. It repaired to -18.6 in June, progressed to -9.4 in July and rose to a reading of just -0.2 in August 2020, before slipping back into weaker readings as weak as -12 to -15 or so. Negative readings returned in December 2021 before the Ukraine invasion which came in February 2022. GfK did not nosedive immediately, but it weakened from -6.9 in Jan-Feb to -8.5 in March 2022, and then fell to -15.7 in April. The bottom fell out as the index plunged to -26.6 in May 2022.

Since May 2022, the GfK reading has averages -30.2. On this truncated timeline, the current reading ranks as the eighth strongest. On that ground, the current reading may embody some hope. But it is still mired in deeply negative readings.

My recitation of German consumer climate history makes it clear that it’s not Covid but the invasion of Ukraine that hit Germany so hard. Of course, that was the second shoe to drop, but it has also been very damaging given German trade links to Russia and German dependence on Russian oil and its gas pipelines.

The economic and income expectations in GfK are also still weak with readings that rank lower only about 30% of the time in both cases. The propensity to buy ranks lower 20.5% of the time. These components of the GfK index are up-to-date only through March. Both economic and income expectations did improve their monthly rankings by four- to five percentage points in March. The propensity to buy was little change on the month.

As for Other Europe... Italy and France have confidence readings up-to-date through February. Italy shows some upward momentum; France does not. France’s confidence ranking is weaker than its February level about 30% of the time- like the German components. Italy is much better off with a 76.6 percentile standing. The U.K. reading on confidence is updated through March and has been relatively stable at a 32.3 percentile standing.

Italy is the outlier here showing more strength than the others although that’s not because of substantially better economic performance. I’d say Italians simply appear to be more resilient. Italian inflation has come down faster than it has elsewhere in Europe. Italian GDP declined early, in Q1 and Q2 of 2023 and has since bounced back strongly in Q3 and Q4 of 2023. But Italy’s retail spending and MFG PMI as well as its conventional industrial production index continue to show weakness and declines. Italy’s unemployment rate also continues to fall but remains well above the EMU rate at 7.2%.

Retail Sales and Orders- The survey on the U.K. distributive trades by the Confederation of British Industry survey (CBI) offers a mixed outlook on current performance, but one that remains decidedly weak. In March sales compared to a year ago post an improved reading of +2, compared to -7 in February and to a much weaker report for January. Orders compared to a year ago, however, deteriorated in March falling to -22 from -14 in February, but still stronger than their weak January level and above their 12-month average. Sales for the time-of-year, a concept which is essentially a seasonally adjusted gauge, moved up to zero in March from -1 in February; again, they are significantly stronger than their January reading and above their 12-month average.

Expected Sales and Orders- The March survey also provides expectations for April. April numbers are generally weak and mixed in terms of month-to-month comparisons. Expected sales measured year-over-year in April survey at a net reading of -25 compared to a -15 expectation in March. This is a sharp monthly deterioration but still an improvement from end-of-year values. It is also a weaker reading than the 12-month average. Orders year-over-year improve from March at a -24 reading, stronger than -36 in March. The expected April reading is stronger than the end of year reading but in line with the 12-month average performance for this metric. Expected sales for the time of year improve very marginally in April to -8 from -9; however, that's a significant improvement from end-of-year values and a reading that's slightly better than the 12-month average.

Metric Rankings- When we assess the retail sales and sales expectations, the results from March and for April have weaknesses. Sales compared to a year ago perform at a 40.8 percentile standing, which is quite weak. Year-over-year orders perform at a 16-percentile standing, while sales for the time-of-year have a 65.5 percentile standing. That's the observation that was flat in March; that performance is slightly better than its historic median performance. However, turning to the expectations for April sales… sales compared to a year ago have an anemic 7-percentile standing, orders compared to a year ago have a 10.5 percentile standing and sales for the time-of-year have a 33.7 percentile standing. All of these are below their historic medians. On balance, while we find some improvement in sales month-to-month - and definite improvement compared to the end of year- the comparisons over the 12-month average are not particularly favorable and the rankings of these index values are quite poor when placed in an historic context.

Wholesaling Wholesale Sales and Orders- For wholesaling in March, there's broad-based weakness with sales year-over-year, orders year-over-year and sales for the time-of-year all posting negative values compared to positive readings in February. However, the March data once again are stronger than data posted back in January and stronger compared to 12-month averages. The performance of the various measures of sales and orders provides a mixed picture over different horizons.

Wholesale Expected Sales and Orders- Expectations for April in wholesaling also turned negative for sales compared to a year ago, orders compared to a year ago, and sales for the time-of-year. All these metrics are negative compared to positive values in March although once again they're significantly stronger than their end of year values and their performance is not generally much different from their 12-month averages.

Metric Rankings in Wholesaling- Assessing wholesaling performance on a ranking format, the current performance of sales compared to a year ago has a 23.9 percentile standing, orders compared to a year ago have a 26-percentile standing, and sales for the time-of-year have a 20-percentile standing. All of these are quite weak and in the neighborhood of a lower 1/4 to 1/5 standing of their respective historic queues of data. Expectations for wholesaling in April stand in their 28th percentile; orders compared to a year ago stand in their 22.8 percentile; sales evaluated relative to the time-of-year stand in their 31.6 percentile. Once again these are weak readings- all of them below their historic medians (below a 50% standing).

In this week's letter, we delve into the recent wave of rate decisions enacted by central banks across the region. We begin by examining the Bank of Japan’s (BoJ) latest policy shifts, highlighting its significant move to terminate its negative interest rate policy. We then explore financial market responses to the BoJ’s decision, discussing possible drivers behind the subsequent weakness of the yen and declines in Japanese government bond (JGB) yields. We move next to review interest rate developments in China, where loan prime rates (LPR) were left unchanged. We then shift our focus to the economies of Australia and New Zealand, where we examine the change in messaging by the Reserve Bank of Australia (RBA) and disappointing Q4 GDP results in New Zealand. Finally, we wrap up the week’s letter with a nod to interest rate decisions in Taiwan and Indonesia.

Recent events speak to the varied stages of monetary policy implemented by central banks in the region, given respective domestic considerations. China continues to pursue an easing approach with economic stabilization looking only nascent, whereas Japan has only recently initiated policy tightening due to encouraging wage growth. Australia and New Zealand, having seemingly completed their tightening cycles, now face increasing pressures to consider easing moves given recent weak economic readings, although with inflation a persisting concern.

Policy shifts by the Bank of Japan Recent headlines have shed light on some subtle yet significant aspects of the Bank of Japan’s (BoJ) departure from its negative interest rate policy. In a notable shift, the BoJ has now set its sights on targeting the uncollateralized overnight call rate to lie between 0% and 0.1% (chart 1). This objective will be accomplished by imposing an interest rate of 0.1% on the current account balances that financial institutions maintain with the bank, starting March 21. Previously, the BoJ aimed at a rate of -0.1% on financial institutions' Policy-Rate Balances. Governor Ueda highlighted that this move signifies the bank's return to a "normal" monetary policy that focuses on short-term interest rates, aligning with practices of other central banks. Additionally, the BoJ has terminated its Yield Curve Control (YCC) policy and announced the cessation of its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). Furthermore, the bank intends to gradually conclude its buying of commercial paper and corporate bonds over the coming year.

The German IFO survey made some significant improvements in March compared to February. The all-sector climate reading grows to -16.1 in March from -23.5 in February. The current conditions index registered a positive 0.6 reading in March after a -1.9 rating in February. The expectations index rose to -16.4 in March from -23.0 in February.

There are some substantial changes and improvements in the month-to-month readings; however, make no mistake about it, the IFO remains very weak. The climate reading, for example, has a rank standing in March at its 19.1 percentile compared to a ranking in at the 6.5 percentile in February. The all-sector current conditions ranking moves up to 13.9 percentile in March from the 11.7 percentile in February. All-sector expectations move up to the 13.4 percentile from the 3.9 percentile in February. These are substantial and significant moves in the month-to-month rankings and for the month-to-month diffusion readings; however, the current readings are still weak. In terms of the values reported last month, the current readings aren't really going to be pointing to an economy that's substantially changed from the readings that we saw a month ago.

However, what's new and what's interesting is there is a month-to-month improvement and it's the first one of some significant value that we've seen in some time and that could mark a turning point. The change is most substantial for expectations, which is also a relatively volatile category and something to keep an eye on. But it's the fact of having an improvement after such a long period of conditions remaining weak that is both impressive and hopeful.

Looking at the various sectors in climate section, construction has the strongest ranking in its 25th percentile - a bottom quartile ranking.

Under current conditions, retail and construction have above-50 percentile standings- above their historic medians. The service sector has the weakest stand-alone ranking in its 15.6 percentile.

Expectations readings show a still-weak 0.8 percentile standing for construction, just off the all-time low made last month. The service sector, with a 15.1 percentile standing, is the strongest ranking sector in expectations.